Forward-Looking Information

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2011 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q, which are incorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are an entrepreneurial pharmaceutical company that discovers, develops and intends to commercialize differentiated medicines that improve patients' lives. To achieve our mission, we are building a team, a culture and processes centered on creating and marketing internal drugs. We believe that linaclotide, our guanylate cyclase type-C agonist, or GCCA, being developed for the treatment of patients with irritable bowel syndrome with constipation, or IBS-C, and chronic constipation, or CC, could present patients and healthcare practitioners with a unique therapy for a major medical need not yet met by existing therapies. Linaclotide is our only product candidate that has demonstrated clinical proof of concept. In August 2011, we and our U.S. collaboration partner, Forest Laboratories, Inc., or Forest, submitted a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, for linaclotide for the treatment of IBS-C and CC. In February 2012, the FDA informed us and Forest that it will not schedule an advisory committee meeting in connection with its review of the NDA. In April 2012, the FDA extended its standard ten-month review period by three months, so the FDA Prescription Drug User Fee Act, or PDUFA, target action date is now in September 2012.

In September 2011, our European partner, Almirall, S.A, or Almirall, submitted a Market Authorization Application, or MAA, to the European Medicines Agency, or EMA, for linaclotide for the treatment of patients with IBS-C, and Almirall continues to work with the EMA in its review.

Our Japanese partner, Astellas Pharma Inc., or Astellas, continues to develop linaclotide for the treatment of patients with IBS-C in Japan and certain other Asian countries. The Company continues to assess alternatives to bring linaclotide to IBS-C and CC sufferers in the parts of the world outside of its partnered territories, which include China.

We also continue to assess lifecycle management opportunities for linaclotide in order to ensure that it is maximizing the drug's potential value. Based on our preliminary efforts to date, we anticipate that these activities will include the exploration of the potential for linaclotide in the pediatric population as well as in other gastrointestinal indications.

We also have a pipeline focused on both research and development of early development candidates and discovery research in multiple therapeutic areas, including gastrointestinal disease, central nervous system, or CNS, disorders, respiratory disease and cardiovascular disease.

We have pursued a partnering strategy for commercializing linaclotide that has enabled us to retain significant control over linaclotide's development and commercialization, share the costs with high-quality collaborators whose capabilities complement ours, and retain approximately half of linaclotide's future long-term value in the major pharmaceutical markets, should linaclotide meet our sales expectations.

We were incorporated in Delaware as Microbia, Inc. on January 5, 1998. On April 7, 2008, we changed our name to Ironwood Pharmaceuticals, Inc.

We currently operate in one reportable business segment-human therapeutics. Our human therapeutics segment consists of the development and commercialization of our product candidates, including linaclotide.

To date, we have dedicated substantially all of our activities to the research and development of our product candidates. We have not generated any revenue to date from product sales and have incurred significant operating losses since our inception in 1998. We incurred net losses of approximately $35.6 million and $18.4 million in the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, we had an accumulated deficit of approximately $468.0 million and we expect to incur losses for the foreseeable future.

In February 2012, we sold 6,037,500 shares of our Class A common stock through a firm commitment, underwritten public offering at a price to the public of $15.09 per share. As a result of the offering, we received aggregate net proceeds, after underwriting discounts and commissions and other offering expenses, of approximately $85.2 million. We intend to use these proceeds for general corporate purposes, including to further strengthen our balance sheet in advance of the potential market launch of linaclotide (if approved).

Financial Overview

Revenue. Revenue is generated primarily through our collaboration agreement with Forest, and our license agreements with Almirall, and Astellas Pharma Inc., or Astellas. The terms of these agreements contain multiple deliverables which may include (i) licenses, (ii) research and development activities, and
(iii) the manufacture of active pharmaceutical ingredient, or API, and

development materials for the collaborative partner. Payments to us may include one or more of the following: nonrefundable license fees; payments for research and development activities, payments for the manufacture of API and development materials, payments based upon the achievement of certain milestones and royalties on product sales. Additionally, if linaclotide is approved by the FDA, we will receive payments from Forest for half of the net profit from linaclotide sales in the U.S. We expect our revenue to fluctuate in the short term based on clinical and commercial milestones and, if it is approved, based on the potential variability of demand for linaclotide.

Research and development expense. Research and development expense consists of expenses incurred in connection with the discovery, development, manufacture and distribution of our product candidates. These expenses consist primarily of compensation, benefits and other employee related expenses, research and development related facility costs and third-party contract costs relating to research, formulation, manufacturing, preclinical study and clinical trial activities. We charge all research and development expenses to operations as incurred. Under our Forest collaboration agreement we are reimbursed for certain research and development expenses, and we net these reimbursements against our research and development expenses as incurred.

Our lead product candidate is linaclotide and it represents the largest portion of our research and development expense for our product candidates. Linaclotide is a first-in-class compound being developed for the treatment of IBS-C and CC and is our only product candidate that has demonstrated clinical proof of concept. An NDA for linaclotide with respect to both IBS-C and CC was submitted to the FDA and the PDUFA target action date is now expected to occur in September 2012.

Additionally, an MAA for linaclotide for IBS-C was submitted to the EMA by Almirall in September 2011 and Almirall continues to work with the EMA in its review.

Our Japanese partner, Astellas, continues to develop linaclotide for the treatment of patients with IBS-C in Japan and certain other Asian countries. The Company continues to assess alternatives to bring linaclotide to IBS-C and CC sufferers in the parts of the world outside of its partnered territories, which include China.

We also continue to assess lifecycle management opportunities for linaclotide in order to ensure that it is maximizing the drug's potential value. Based on our preliminary efforts to date, we anticipate that these activities will include the exploration of the potential for linaclotide in the pediatric population as well as in other gastrointestinal indications.

We also have a pipeline focused on both research and development of early development candidates and discovery research in multiple therapeutic areas, including gastrointestinal disease, CNS disorders, respiratory disease and cardiovascular disease.

The following table sets forth our research and development expenses related to our product pipeline for the three months ended March 31, 2012 and 2011. These expenses relate primarily to external costs associated with manufacturing, including supply chain development, preclinical studies and clinical trial costs. Costs related to facilities, depreciation, share-based compensation and research and development support services are not directly charged to programs.

                                           Three Months Ended
                                               March 31,
                                            2012         2011
                                             (in thousands)
Demonstrated clinical proof of concept   $    10,145    $ 3,523
Early development candidates                   6,093      2,784
Discovery research                             3,570      4,894

We began tracking program expenses for linaclotide in 2004, and research and development program expenses from inception to March 31, 2012 were approximately $158.2 million. The expenses for linaclotide include both reimbursements to us by Forest as well as our portion of costs incurred by Forest for linaclotide and invoiced to us under the cost-sharing provisions of our collaboration agreement.

The lengthy process of securing FDA approvals for new drugs requires the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall. Accordingly, we cannot currently estimate with any degree of certainty the amount of time or money that we will be required to expend in the future on linaclotide or our other product candidates prior to their regulatory approval, if such approval is ever granted. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, linaclotide, or any of our other product candidates will generate revenues and cash flows.

We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data. In addition, we are actively engaged in evaluating externally-discovered drug candidates at all stages of development. In evaluating potential assets, we apply the same criteria as those used for investments in internally-discovered assets.

The majority of our external costs are spent on linaclotide, as costs associated with later stage clinical trials are, in most cases, more significant than those incurred in earlier stages of our pipeline. Although we have completed the anticipated development program to support the linaclotide NDA and MAA, we expect to continue to incur costs to support linaclotide development in currently unpartnered territories and in other gastrointestinal indications. Additionally, if our other product

candidates are successful in early stage clinical trials, we would expect external costs to increase as the programs progress through later stage clinical trials. The remainder of our research and development expense is not tracked by project as it consists primarily of our internal costs, and it benefits multiple projects that are in earlier stages of development and which typically share resources.

The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:

† The duration of clinical trials may vary substantially according to the type, complexity and novelty of the product candidate.

† The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures.

† Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activity. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.

† The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict.

† The costs, timing and outcome of regulatory review of a product candidate may not be favorable.

† The emergence of competing technologies and products and other adverse market developments may negatively impact us.

As a result of the uncertainties discussed above, we are unable to determine the duration and costs to complete current or future preclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data of each product candidate, the competitive landscape and ongoing assessments of such product candidate's commercial potential.

We expect our research and development costs to continue to be substantial for the foreseeable future and to increase with respect to our product candidates other than linaclotide as we advance those product candidates through preclinical studies and clinical trials. Additionally, our research and development costs will increase as we will fund full-time equivalents for research and development activities under our external collaboration and license agreements that are not related to linaclotide.

General and administrative expense. General and administrative expense consists primarily of compensation, benefits and other employee related expenses for personnel in our administrative, finance, legal, information technology, business development, commercial and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs and professional fees for accounting and legal services. We anticipate substantial increases in expenses related to developing the organization necessary to commercialize linaclotide.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S., or GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reported periods. These estimates and assumptions, including those related to revenue recognition, research and development expenses and share-based compensation are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. These critical estimates and assumptions are based on our historical experience, our observance of trends in the industry, and various other factors that are believed to be reasonable under the circumstances and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions.

During the three months ended March 31, 2012, we adopted Accounting Standards Update, or ASU, No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or ASU 2011-04, ASU No. 2011-05, Presentation of Comprehensive Income, or ASU 2011-05, and ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, or ASU 2011-12, as discussed in Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no significant changes to our critical accounting policies and estimates, including as a result of the adoption of these standards. See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on February 29, 2012 for additional information about these critical accounting policies, as well as a description of our other significant accounting policies.

Results of Operations



The following discussion summarizes the key factors our management believes are
necessary for an understanding of our condensed consolidated financial
statements.



                                       Three Months Ended
                                           March 31,
                                        2012        2011
                                         (in thousands)
Collaborative arrangements revenue   $   12,248   $  10,237
Operating expenses:
Research and development                 29,510      19,555
General and administrative               18,374       9,224
Total operating expenses                 47,884      28,779
Loss from operations                    (35,636 )   (18,542 )
Other income (expense):
Interest expense                            (14 )       (16 )
Interest and investment income               49         154
Other income                                  -           3
Other income (expense), net                  35         141
Net loss                             $  (35,601 ) $ (18,401 )

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011



Revenue



                                       Three Months Ended
                                           March 31,              Change
                                        2012         2011        $       %
                                          (dollars in thousands)

Collaborative Arrangements Revenue. The increase in revenue of approximately $2.0 million from collaborative arrangements for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily related to the Almirall license agreement. In June 2011, we revised our estimate of the development period associated with the Almirall license agreement which resulted in approximately $2.1 million in additional revenue recognized during the three months ended March 2012.

Operating Expenses



                               Three Months Ended
                                    March 31              Change
                                2012         2011        $        %
                                      (dollars in thousands)
Operating Expenses:
Research and development     $    29,510   $ 19,555   $  9,955   50.9 %
General and administrative        18,374      9,224      9,150   99.2 %
Total operating expenses     $    47,884   $ 28,779   $ 19,105   66.4 %

Research and Development Expense. The increase in research and development expense of approximately $10.0 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily related to an increase of approximately $3.3 million in compensation, benefits, and employee related expenses associated mainly with increased headcount, an increase of approximately $0.6 million in share-based compensation expense primarily related to our new hire grants and our annual stock option grant made in February 2012, an increase of approximately $1.7 million in external research costs related to the research and development fees paid in connection with our licensing agreements that are not related to linaclotide, including the milestone payment and the impact of the timing of upfront payments, an increase in linaclotide related expenses of approximately $2.9 million primarily resulting from higher net collaboration expenses from Forest and an increase of approximately $1.1 million in research and development related facilities costs, including rent and amortization of leasehold improvements, associated with additional space we leased in our 301 Binney Street facility.

General and Administrative Expense. The increase in general and administrative expense of approximately $9.2 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily related to an increase of approximately $2.8 million in compensation, benefits and other employee related expenses associated with increased headcount, an increase of approximately $0.4 million in share-based compensation expense primarily related to our new hire grants and our annual stock option grant made in February 2012, an increase of approximately $0.7 million in general and administrative related facilities costs associated with our 301 Binney Street facility, including rent and amortization of leasehold improvements, an increase in external consulting costs of approximately $1.9 million primarily associated with developing the infrastructure to commercialize and support linaclotide, as well as increased investor relations activities, an increase of approximately $0.7 million in external market research costs, and an increase of approximately $2.3 million in the net expense from Forest on our collaborative commercial activities.

Other Income (Expense), Net



                                      Three Months Ended
                                          March 31,              Change
                                      2012         2011        $        %
                                             (dollars in thousands)
Other income (expense):
Interest expense                    $     (14 )  $     (16 ) $    2     12.5 %
Interest and investment income             49          154     (105 )  (68.2 )%
Other income                                -            3       (3 ) (100.0 )%
Total other income (expense), net   $      35    $     141   $ (106 )   75.2 %

Interest and Investment Income. The decrease in interest and investment income for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily related to lower average cash balances and interest rates during the three months ended March 31, 2012.

Liquidity and Capital Resources

At March 31, 2012, we had approximately $202.1 million of unrestricted cash, cash equivalents and available-for-sale securities. Our cash equivalents include amounts primarily held in money market funds, stated at cost plus accrued interest, which approximates fair market value. Our available-for-sale securities include amounts held in U.S. Treasury securities and U.S. government-sponsored securities. We invest cash in excess of immediate requirements in accordance with our investment policy,

which limits the amounts we may invest in any one type of investment and requires all investments held by us to be A+ rated so as to primarily achieve liquidity and capital preservation.

During the three months ended March 31, 2012, our cash balances increased approximately $44.3 million. This increase is primarily due to the approximately $85.2 million in net proceeds from our public stock offering in February 2012 and approximately $1.0 million in proceeds from the exercise of stock options, partially offset by the cost to operate our business, as we made payments related to, among other things, research and development and general and administrative expenses as we continue to increase headcount and build infrastructure for our anticipated commercial launch of linaclotide and as we invest in our research pipeline. We also invested approximately $4.6 million in capital expenditures and made payments of approximately $0.1 million on our capital leases.

Sources of Liquidity

We have incurred losses since our inception on January 5, 1998 and, as of March 31, 2012, we had an accumulated deficit of approximately $468.0 million. We have financed our operations to date primarily through both the private sale of our preferred stock and the public sale of our common stock, including approximately $203.2 million of net proceeds from our IPO in February 2010 and approximately $85.2 million of net proceeds from our public offering in February 2012; payments received under our strategic collaborative arrangements, including milestone payments and reimbursement of certain expenses; debt financings; strategic sale of assets or businesses and interest earned on investments. We expect to receive $85.0 million in collaboration milestones upon the FDA approval of linaclotide.

Funding Requirements

To date, we have not commercialized any products and have not achieved profitability. We anticipate that we will continue to incur substantial net losses for the next several years as we further develop and prepare for the anticipated commercial launch of linaclotide, execute on that commercial launch, if approved, continue to invest in our pipeline, develop the organization required to sell our product candidates and operate as a publicly traded company. We have generated revenue from services, up-front license fees and milestones, but have not generated any product revenue since our inception and do not expect to generate any product revenue from our collaborative arrangements or the sale of products unless we receive regulatory approval for commercial sale of linaclotide. As a result, we expect to incur future losses on a quarterly and annual basis at least until we obtain marketing approval and successfully commercialize a product.

We believe that our cash on hand as of the date of this Quarterly Report on Form 10-Q and additional cash milestone payments we may receive from our current or future collaborators provides significant optionality and will be sufficient to meet our projected operating needs through the anticipated commercialization of linaclotide.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, including the underlying estimates regarding the costs to obtain regulatory approval and the costs to commercialize . . .